Debt Collection 7

[chris9]

I'm well aware that many small engineering businesses run into difficulty either because of late or non-payment. As a consumer if I received goods or services and refused to pay for them or decided I will pay when I feel like it I would expect a debt collection agency to come knocking on my door.

However, I often hear about small engineering companies simply writing off debts instead of aggressively pursuing payment. Why is it that an electrical store will ruthlessly pursue and retrieve a £200 debt but a small engineering firm will often write off thousands of pounds of debt?

Is there any procedure a small engineering firm can adopt to guarantee payment for services by a specified date without damaging customer/client relations?

 

[RDK]

Usually any client sued for non-payment will counter claim with incompetence.

The only was to guarantee payment is to get it up front and bill against the retainer. This is common in some business sectors. I understand that it is typical in the mining industry.

Here in Manitoba the Builder’s Liens Act specifically bars engineers from filing liens against property. We can have considerable amounts invested in the design and have no legal standing except as an unsecured creditor and a tradesman who does not get paid can file a lien against the property and become a secured creditor.

It seams that your only protection is to pick your clients carefully, but this cannot always be done in the current economy.




Rick Kitson MBA P.Eng

Construction Project Management
From conception to completion

http://www.kitsonengineering.com

 

[chris9]

Rick,

This has reinforced my theory that engineers really are second-class citizens. I wonder if there are any law firms who don't get paid for their work?

 

[bvi]

Well, it also has to do with many engineers simply not being very good business people. It is not really what many are interested in; they are typically interested in the technology. If all engineers required their fees up front, we could get it. However, since most do not, it is difficult to get this, since your competition does not require it.

The best measures are an appropriate retainer, which at least shows the client has some intention to pay, and qualifying the client before working with them. Then, keep in touch with the client, and follow up on invoices.

There are debt collection services such as Dunn & Bradstreet that are not particularly costly to use. If the account gets too overdue, simply hand it over to them. There is no way deadbeats should be let off the hook for paying for legitimate professional services.

 

[JoeTank]

chris9,
I have worked for a small consulting firm for 17 years. Our uncollectable fees have always been no more than 1/4 of 1% over this entire period. Slow payers have been a nuisance, but we never just wrote them off. We were persistent in our attempts to be paid. Writting off fees is a business decision for some firms. To us, there was a principal involved... we should be paid for our services.

That principal also cuts both ways. If we screwed up we stood tall for our mistake and did whatever rework was appropraite to assure that we were paid in full.

Much of the write-off that you hear of is often due to poor performance on the part of the consultant. Write-off can become the unethical way out of a problem by just burying your head on the sand and avoiding facing up to the unhappy client.



Steve Braune
Tank Industry Consultants

http://www.tankindustry.com

 

[pmkPE]

Gentlemen,

I respectfully recommend that you obtain a purchase order number (PO) whenever possible before proceeding with your work. If you cannot obtain such legal qualification state in your proposal that payment is due within 30 days, 15 days, upon receipt of the service (i.e. drawings, report etc), or some other period that is acceptable to you. Put in writing that which you propose to do, when you will complete your work, what is to be delivered to your clients and the terms for your compensation (amount and time for payment).

If you are working with an established business such as a manufacturing company they will comply (they also expect you to deliver as written).

However, if you are unsure of the character of the client then ask for a retainer of some substantial amount that will allow you to finance your beginnings of the project. If nothing else their hedging on giving you a reasonable retainer should tell you something of their intentions. Also, for those clients that you have doubts about, Do Not deliver the goods until you have payment in hand.

Many of our clients, the people that we deal directly with, want to honor our agreements (usually payment is net in 30 days) however, their accounting departments often find creative excuses for not meeting that deadline. With the economy the way it is (mediocre) many of our clients deliver payment 45-60 days after receipt of our invoices!

As stated previously by cb4, this is a business - and you have entered into an agreement either verbally or written, both of which are enforceable in court. Don't let unscrupuluos clients take advantage of your honest efforts.

If I may ramble.... one contractor stiffed me and my company for a measly $600 dollars. I took him at his word and he didn't pay. So I filed a mechanics lein against his "company". (He worked out of his house doing small time renovations). The mechanics lein made it impossible for him to acquire any additional credit or financing until the lein was paid in full. If he had paid after the first month we would have split the difference with the collecting company. After the second month we would have recieved 25%. This contractor did not pay for a full year. But when he needed financing, he did come up with the money and he paid the collection agency the $600. That was fine with me. We didn't get what was due to us, but he didn't get to keep what wasn't rightfully his. Stick to your rights, be consistent and fair with the clients that are willing to work with you; and for those that lack integrity let them find someone else to take advantage of, after you get your payment.

 

[RDK]

PmkPE

From a business standpoint having a lien filed against you might not be a big deal.

A lien will affect your ability to get financing but if you don’t go for outside funding then there is no effect.

A lien against real property will affect your ability to sell it but if you don’t sell it then it has no effect.

As your story illustrated since it was one year for the debtor to need outside credit it took that long for you to get anything. After collection fees and the value of your time was the aggravation worth it?

A retail store does not sell based on reputation. They each sell the same manufactured product and most sales are price based. They also have a lot of small customers. They therefore have the luxury to chase and hound debtors who do not pay. Loosing one really does not make a lot of difference.

Consultants sell based almost solely on reputation. We also tend to have fewer customers who have much larger individual purchases. These purchases are not made solely on the basis of lowest cost.

You now have a contractor out there who is willing to tell everyone that you acted poorly. Since it is his word against your silence, (you cannot tell your side to someone you don’t know.) guess which version gets believed.

The best defence against getting stiffed is to get written contracts and to as much as possible deal only with reputable customers.


Rick Kitson MBA P.Eng

Construction Project Management
From conception to completion

http://www.kitsonengineering.com

 

[pmkPE]

RDK,

Thank you for your input. Please note the following:
1) We did not receive compensation for the services rendered; instead we obtained satisfaction that the unethical contractor did not get away with keeping his money after we delivered the goods;
2) True, mechanics leins are frustrating and we were only dealing with a loss of $600. I did not want to invest more time trying to collect such a small amount and end up losing more money (time = manhours = money);
3) I did have a purchace order in hand, in the contractors own writing - but attorneys cost at least $150/hour. Going with a collection agency seemed to be the least expensive alternative to a bad situation;
4) This kind of client is not one that we want to continue to do business with. I do not fear what an unethical contractor says about me or my firm. My work speaks for itself, and I also believe that someone of that contractor's type is recognized by others for what he is! After all if he is willing to stiff my firm, which he could only do one time (for a small amount of money at that) imagine what he will do when the stakes are larger. His character is established by his actions - his actions speak louder than words. His contacts will eventually recognize him for what he is;
5) We live and work in the real world - not everyone is ethical, honest or fair. I took this man at his word and have learned a valuable lesson - some of which I wrote in my initial response to this thread.
6) We have a client that is an international corporation, unlike our other clients that we have been doing business with for more than a half century, we never start work, let alone hand over work, to them without their approved purchase order in hand. (Not a verbal promise that "it" is coming). They have a reputation for asking and receieving without paying, since they claim a PO was never written, for both contractors and engineers alike. From our perspective this company has a reputation that we would not want, yet we still provide services to them - When we have an approved PO from them, and never before. (Also when we work with this client we always think twice about what unethical conduct may or may not occur.)

 

[jmw]

re: your original post, retailers expect a level of bad debt and have mechanisms in place to make the recovery of a proportion of this debt very cost effective. It is the same with unpaid parking tickets and the like.

In a business, it is expected that some provision should be made for bad debt and for late payment. Late payment is as much a risk as non-payment. There are many businesses that have gone under, despite every appearance of being successful, because late payment has had a critical impact on cash flow.

Late payment is addressed by mechanisms such as offering discounts for prompt payment. Some companies like to deduct a prompt payment discount as a matter of course when settling their bills. It may or may not be in the contract.

In the case of known late payers, look for a solution that isn't confrontational. If they are repeat business then any expected behaviour should be managed. Most countries publish an index of the average time in days for payment. You may have 30days in the contract but the average is often 40-50days. You have to factor this into yout cash flow.

For all accounts, even one off accounts, seek three trade references and a bank reference, for accounts above a certain value have a Dun & Bradstreet report or similar. You can't risk giving credit without this. If the client cannot provide references, then insist on proforma invoicing.

If the debt isn't paid write to the references. Sooner or later these companies will be unable to offer references and will be only able to trade on a cash up front basis. I am sure that some companies may deliberately spread their small orders around in the full expectation that they can avoid payment.

I would suggest using your local trading standards, chamber of commerce etc to the fullest both to make others aware of bad payers and to press for legislation to protect against them.

However, the bottom line is cost. Inevitably there will always be bad debt, sometimes for fair reasons (the client went bankrupt) and sometimes not. It is as much a cost of doing business as the power bill, the rates and salaries.

You don't ignore it, you always try to accurately predict it but you don't lose sleep over it. If you understand it and can limit it to predictable values then your business is sound. Stores don't like shop-lifting but if they didn't factor it in to their costs they would be out of business.

 

[MarauderX]

We were owed about $250,000 in back debts, and we were only a 7-person firm. The debts were often from those who would only pay 80% of what was owed, and once it started with a client they would repeat the same thing with the next project. Our managers were nice, and didn't want to burn any bridges with the relatively good clients they had, but they still wanted paid. So we got a debt collection company on board and explained the situation. They charged a lot, and naturally not all was collected, but at least we got to see more than half the cash that was owed us and not get into a campaign of slander with more than one client. For a period of 6 months we refused services until they had paid us at least a small amount. It was fun, though we were walking on thin ice after the dotcom crash. The collection agency was tactful and responsive. They kept meticulous records and kept us appraised of everything. They never once had to resort to legal responses or breaking limbs.

 

[adognamedgromet]

Unfortunately that type of behavior is rampant in the automotive industry in North America. There are certain states that have implemented laws specifically about this too.

It is a circular problem. By this I mean that the chances that it has happened to your customer is very high. Then he does this to you etc. You have to be very tough about it and make sure you get paid sooner rather than later. If two years slip past and no payment then the customer will feel more and more justified to not paying. We are having problems like this and we have to nip it in the bud. We have tried to collect our selves, had a collection agent do it and now we are hiring a lawyer. We try to deliver good quality and do it on time. What do you do when that isn't enough?

The best things that I have found are to be careful whom you work with. The smaller organizations are the ones that have a worse problem with this (it is a shame too). The ISO9000 companies with hundreds of employees handle these situations better.

You can also go to the library and look the company in a trade directory and it will tell you their credit rating in advance. The one I used is a Print Directory by

http://infocanada.ca/

At the library it is free too.

Also file a claim with the credit bureau of your area. If they did this to Visa then it would muck up their credit rating and Visa wouldn't think twice about it. We filed against one of ours and we let him know we were going to it only cost us $30 or so. His credit rating has dropped a notch or so and it is recorded that he did it. But we are still fighting to see our funds. We have held his account and won't work with him until it is cleared.

There are many books on collection and they are good (your local library is a good resource). Read "Paid in Full by Timothy Paulsen"

http://www.trpaulsen.com/

I should really be reading the ones on sales though. Collection is too tough of a subject.

Regards

Rick Marmei - Tool Designer

http://axis-design.org

 

[jmw]

A well known retail operation(in the US, famous for their catalogues) has (had? they are in a very parlous condition now, I believe) a system where they happily sold product on credit to anyone who wanted it. They then sold the whole billing operation on to another company. That company pays them so much for the "debts" and it is then upto them to collect it.

So, effectively, they (the retail company) don't have any worries about the credit worthiness of their clients, the more the merrier, since they don't have to try and collect. For them this big credit volume is an asset that is valued and sold.

Of course, given their curent state, i am not sure that this is a system that should be emulated. In fact, the way it is set up is practically an invitation to bad debt.

JMW

http://www.viscoanalyser.com

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